Russia`s image problem in the US

Chris Osborne, Head of Sberbank CIB USA, would be the first to admit that Russia has an image problem among American investors.

"Selling Russia can be a challenge,” he told beyondbrics. "For people who are not already investors in Russia, the image of the country is very negative.”

Indeed, despite being the world’s ninth largest economy with a rising middle class that’s driving a boom in everything from car sales to malls to e-commerce and holidays in Spain, Russia hasn’t been getting much love from investors.

Last year Russian equity and fixed income funds attracted a combined $8.8bn of inflows according to EPFR, which tracks fund flows. While this is a leg up from 2011 – when Russia suffered an outflow of $2bn – the amount is still far less than the $12.9bn that investors pumped into Brazilian assets and the $16.5bn attracted by Chinese assets in 2012, according to EPFR.

Reports of widespread corruption and political infighting haven’t helped, especially at a time when investors have become much more risk-adverse. But then plenty of other countries – China comes to mind – face similar problems.

Instead, Osborne thinks a more fundamental roadblock is the nature of Russia’s economy, which is overly dependent on oil and gas revenues.

"Half of Russia’s revenues come from tax on oil, and the Micex [Russia's main stock exchange] is tremendously weighed towards energy,” says Osborne. "But the problem is there is no growth in this sector. Growth is in domestic manufacturing and consumption. But how can you actually invest in that given the dearth of listed consumer or manufacturing stocks? That’s the challenge.”

Even if growth is coming from other sectors, investors know that rising consumption is being fueled by oil money. The result is that even though Russian equities are cheap and are trading at discounts to their EM peers on a forward price/earnings basis, the value of Russian equities held by US institutions has fallen to a quarter of levels in 2008 when it hit $25bn.

All this adds up to a tall order for Osborne in the US. Russia has historically been the bread and butter for Sberbank CIB – even more so perhaps now that the group (formerly known as Troika Dialog) has been acquired by Sberbank in a $1bn-plus deal two years ago.

"Our focus is on bringing more companies like Megafon [the mobile operator] to the market,” said Osborne. "The more the index reflects the sources of growth, the easier it would be to increase the pool of US investors.”

On this front, Osborne is cautiously optimistic.

"Much will depend on the conditions in the global markets,” he said. "But for now the pipeline is looking pretty robust.”

Osborne declined to go into details but said transport would be a sector to keep an eye on. He also expects Moscow to push ahead with its multibillion dollar privatisation programme.

But even then, investor sentiment towards Russia’s equity market could be dented by recent comments from President Vladimir Putin, who said all offerings by state-owned Russian companies should take place in Moscow only.

The IPO of the Moscow Exchange, for example, took place in Moscow only. It is also understood that VTB, if it does go ahead with its share sale, would not be issuing any shares overseas.

For Sberbank CIB, a decline in trading commission has been offset by growth in fees made from investment banking and underwriting bond issues.

Prior to its acquisition by Sberbank, the group received most of its income from trading. Last year, it was a split between investment banking/underwriting fees and trading.

"Our partnership with Sberbank has greatly increased access to deals,” said Osborne.

The money generated from the deal side of things should give Sberbank CIB plenty of cushion to work changing investors’ perception of Russia – one account at a time.